Pillar Two Implementation in Europe, 2025

In recent years, countries have debated significant changes to international tax rules affecting multinational companies. In October 2021, after negotiations at the Organisation for Economic Co-Operation and Development (OECD), more than 130 member jurisdictions agreed to an outline for new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rules. Pillar Two introduces the global minimum tax with an effective tax rate of 15 percent (increasing tax revenues by an estimated $220 billion globally).

Pillar Two includes three main rules that establish the global minimum tax: The first is a qualified domestic minimum top-up tax (QDMTT), which countries could use to claim the first right to tax profits currently being taxed below the minimum effective rate of 15 percent. The second is an income inclusion rule (IIR), which determines when the foreign income of a company should be included in the taxable income of the parent company. When a company’s effective tax rate falls below 15 percent, additional taxes would be owed in its home jurisdiction.

The third rule in Pillar Two is the undertaxed profits rule (UTPR), which allows a country to increase taxes on a company if another related entity in a different jurisdiction was being taxed below the 15 percent effective rate. If multiple countries apply a similar top-up tax, the taxable profit would be divided based on the location of tangible assets and employees.

Together, the domestic minimum tax, income inclusion rule, and undertaxed profits rule create a minimum tax both on companies investing abroad and foreign companies investing domestically. They are all tied to the minimum effective rate of at least 15 percent and would apply to each jurisdiction in which a company operates.

The EU Directive on Pillar Two obliges Member States with more than 12 in-scope multinational groups to implement the IIR starting 31 December 2023, and the UTPR starting 31 December 2024. Member States with no more than 12 in-scope multinational groups can elect to defer implementing both rules for six years under Article 50 of the Directive.